HKEX explores new opportunities with MSCI

Hong Kong Exchanges and Clearing sees a compelling future for its suite of products based on MSCI indexes tracking Asian and emerging markets, according to Kevin Rideout, managing director, head of global client development.

“We’re on the doorstep of China, which is going to become an influential participant in global markets,” Rideout said.

“The MSCI franchise allows us to branch beyond our doorstep into the rest of the world, so all of a sudden we’ve got open interest in Thailand, Malaysia, Australia and India, all here in Hong Kong, so I think it’s incredibly exciting for both parties, and increasingly for the market as well.”

Under its deal with MSCI, HKEX has licensed the indexes for 37 options and futures contracts. In the Asia-Pacific, the indexes had been licensed to the Singapore Exchange (SGX), which from February next year will no longer list products related to these indexes, but will retain its partnership with MSCI for Singapore index products.

“I often talk about why it is that MSCI and HKEX joined arms, as it were, and I think from the MSCI perspective it’s really the ecosystem that Hong Kong offers,” Rideout said.

That ecosystem includes Stock Connect, HKEX’s investment channel connecting the Shanghai and Shenzhen stock exchanges with over HK$2 trillion (£199 billion) in assets; an options market trading close to a million contracts a day; and the world’s largest structured products markets.

“We’ve also got one of Asia’s largest exchange-traded fund (ETF) markets, so that product ecosystem is already very exciting, and marries up to what we do in futures, which has until now really focused on products around the Hang Seng Index and Hang Seng China Enterprises Index,” Rideout said.

Alexander Siu, senior vice president, co-head of equities product development, said the MSCI suite sets HKEX on a very different path from a derivatives standpoint, as the exchange can now serve a much broader audience.

“You don’t get too many venues that list 30-odd contracts over such a short period of time,” he said. “Most of that suite was launched in a staggered manner between July and August to give the market time to onboard and engage with the contracts, and to build the market-making behind them.”

The listings were issued in tranches starting with 10 US dollar-denominated futures on July 6 tracking underlying equities in markets including Australia, mainland China, India, Indonesia, Japan, Malaysia, Taiwan and Thailand. A further seven followed on July 20, eight on August 3 and another eight on August 17. More contracts will be launched on September 28 and later in the year.

When HKEX entered its deal with MSCI, Siu said, not all the contracts previously listed at SGX had open interest. Currently, open interest is building in 11 contracts with a particular focus on MSCI Taiwan (USD) Index futures, USD futures on the MSCI China Free Index which tracks large and mid-cap Chinese companies, and MSCI EM Asia Net Total Return (USD) Index futures.

According to Rideout, growth in open interest in China Free is particularly encouraging.

“In the cash market, we’re seeing a ‘back home to Hong Kong mantra’ that keeps coming off the US market,” Rideout said. “If you look at that China Free contract, some of the underlying stocks are now trading in Hong Kong, so if you believe that futures like to trade around the underlying cash market, then that’s probably the clue as to why China Free is quite popular already.”

Taiwan index futures have also proved popular, leading HKEX to expand its offering with the launch of futures on the MSCI Taiwan 25/50 Index scheduled for September 28. That contract is also being introduced for regulatory reasons due to the index weighting of stocks in the existing MSCI Taiwan index futures contracts, which did not align with the requirements of the Commodity Futures Trading Commission for approval in the US.

According to Rideout, there is already significant interest in the upcoming contract.

“The question that I get the most from the banks in particular is: when is it coming, can you make it come faster?,” he said.

Looking ahead, key markers for the full MSCI suite’s open interest development fall on the quarterly rolls at the end of September and again in December.

“Broadly speaking we do see the growth coming,” Siu said. “It’s taken a little bit of time for the market to assess and view, but we’ve got a lot of good datapoints around our market makers, liquidity provision and how our order book is building.”

As liquidity develops, HKEX has big plans for product development around its MSCI Index franchise.

“One of the key strengths of Hong Kong is the size of our options market, so ultimately you’d want to see options building out on the MSCI suite, as well as ETFs down the road,” Rideout said.

Rideout also believes that, with the addition of China A-shares to the MSCI Emerging Markets index in 2018, the direction of travel is now much more towards Asia.

“Once China gets its full weighting, say in four or five years’ time, the vast majority of the emerging market weighting will be in Asia. So it makes sense for the MSCI suite to live and breathe next to the markets that operate here.”